THE ARAB MONETARY FUND PUBLISHES THE EIGHTH ISSUE OF THE "POLICY BRIEF" SERIES ON "EFFECTIVE INVESTMENT"

by **claud39** Thu Dec 19, 2019 9:18 am

THE ARAB MONETARY FUND PUBLISHES THE EIGHTH ISSUE OF THE "POLICY BRIEF" SERIES ON "EFFECTIVE INVESTMENT"

2019-12-19

Effective investment is an important mechanism for financing projects that aim to achieve a social and environmental return in addition to the financial return

Directing about 10 per cent of global financial assets towards influential investment, ensuring sustainable development goals

The absence of a unified understanding of the nature of influencing investment and the complexity of the impact measurement process, are among the most important challenges

Arab governments are encouraged to take advantage of the influential investment in financing sustainable development projects

Ensuring stimulating legal and regulatory frameworks, and activating the role of wealth, insurance and pension funds, are essential factors to stimulate effective investment in Arab countries

In the context of its keenness to develop its research activities, the Arab Monetary Fund launched a new periodic research series entitled "Policy Brief", aimed at supporting decision-making in the Arab countries by providing summary research publications that address the most prominent priorities and topics of concern for Arab member states accompanied by recommendations for policymakers .

The eighth issue of this series touched on the topic "influencing investment", as it pointed to the growing interest in influencing investment in recent times as an important mechanism for mobilizing financial resources and directing investments towards projects aimed at achieving a social and environmental return in addition to the financial return [1]. Effective investment is one of the three types involved in sustainable investment, also known as Socially Responsible Investment, in which the investor incorporates environmental and social factors and governance into investment decisions. Effective investment requires the fulfillment of three basic conditions: 1. Targeting the achievement of impact, and 2. Contribute to achieving impact, and 3. Impact measurement.

This type of investment is linked to financing development projects and projects with economic and social returns that help to sustain development and benefit the societies that implement these projects. Accordingly, a number of countries are counting on this type of investment to achieve sustainable development goals that range from reducing poverty, providing jobs, ensuring sustainable consumption and production, improving education, health, infrastructure support, combating climate change, and other other development goals. Which has grabbed the attention of a segment of investors, recently directed towards this type of investment. Effective investment is implemented through a number of investment tools, including assets invested in influential investment funds, as well as social bonds, green bonds, private equity issues, and co-financing, as well as results-based investment models including impact bonds. Social (Impact Bonds Social). It can also be done through soft loans and other financing models, provided that the investment management is committed to achieving the targeted social and environmental return, according to a mechanism to measure and track the impact.

In terms of economic and social gains for this type of investment, the policy brief indicated that this type of investment brings great economic benefits to governments, the most important of which is to enable developing countries to overcome part of the financing gap in the sustainable development goals. As international estimates indicate that developing countries face a funding gap of between 2.5 and 3.0 trillion dollars annually to achieve the sustainable development goals by 2030. [2] At a time when the World Bank estimates that national governments will only provide between 50 and 80 per cent of the funding required to achieve the sustainable development goals. Thus, the biggest challenge facing the governments of developing countries is how to stimulate non-traditional and innovative mechanisms to finance sustainable development.

In this context, a survey of influential investment projects conducted by the International influencing Investment Network confirms the close link between these projects and the achievement of sustainable development goals, as 62 percent of the 266 investment institutions included in the survey indicate that their total managed assets are about $ 502 billion, that investment projects The influencer in which you invest, aims to achieve the sustainable development goals, whether now or in the future. On the other hand, given that the influencing investment is one of the branches of socially responsible investment, it embodies a new trend to enhance the spirit of social responsibility in the private sector [Corporate Social Responsibility (CSR)] and deepens the role of the private sector in achieving economic and social development and leads towards a financial sector more able to ensure sustainability Growth and development and reducing the risks of irresponsible investment that caused the global financial crisis.

Moreover, this type of investment, contrary to the belief of many, achieves a profitable return for investors and confirms the mistaken impression that the projects with social return generate less financial returns compared to their traditional counterparts. According to a sample of influential investment projects that include 48 projects that were implemented in India - which is considered one of the most important influencing investment markets - with a value of 5.2 billion dollars, when investors exited from these projects, the average return on investments reached 10 percent on average during the period (2010-2015) ), While a third of these projects achieved a financial return of 34 percent, which clearly indicates that it is possible to achieve profitable financial returns by investing in social projects. Sectorally, influential investment projects aimed at increasing levels of financial inclusion have achieved financial returns that are the highest among these projects ([4]).

In this context, the international financial institutions concerned with encouraging and setting controls for this type of investment. Despite the noticeable increase in the size of the influencing investment and the activity of many investment funds in this type of project, the challenge facing investors who wish to enter into this type of investment before 2019 was the absence of international controls to ensure projects are managed in a manner consistent with the approach Effective investment, including creating a kind of complexity and confusion for investors, including the differences between this type of investment and other forms of sustainable investment. Accordingly, IFC, in cooperation with a number of other international institutions and investment funds, developed and launched operational principles for influencing investment management in February of 2019. These principles support the development of the impact investment industry by creating a unified system for influencing investment management.

With regard to the size of the influential investment market globally, the summary indicated that the accurate estimate of the size of this type of investment is facing difficulties due to the relatively recent nature of this type of financing and the absence of standards and controls for codifying this type of investment before the issuance of the operational principles of the influential investment management issued by IFC, That allows for the demarcation of the boundaries between the assets invested in the influencing investment and the similar ones invested in the framework of sustainable investment in general. Nevertheless, the International Finance Corporation estimates the size of the global financial assets held by institutions and families around the world at about $ 269 trillion. In the event that the world can direct only about 10 per cent of these assets towards effective investment that focuses on improving social and environmental returns, this will ensure the achievement of sustainable development goals, including facilitating the transition to a low carbon future.

Based on the above and in light of the increasing interest in influential investment, the International Finance Corporation estimates the size of the potential influential investment market, according to investor appetite levels, at about $ 26 trillion. The actual benefit from investor appetite levels based on this type of investment depends on the extent of investment opportunities and investment tools that enable investors to track the impact and financial returns in sustainable ways. Geographically, the bulk of the influential investment funds are concentrated in Europe and North American countries, which account for about 64 percent of the investment funds that target and measure the impact, while the share of countries in the Middle East region that includes Arab countries with this type of investment is significantly reduced to no It exceeds 1 percent of the total globally influenced investments [5].

The summary also touched on the challenges facing this type of investment, among which comes the initial impression prevailing among investors of the difficulty of achieving a financial return equal to the return of traditional investments. Nevertheless, practical practices indicate otherwise, as many of these projects have been able to achieve good financial return. The same is confirmed by the International Finance Corporation, which indicated that effective investment projects implemented by the institution on average achieve returns in line with the general market indicators related to emerging markets, which allowed them to achieve financial results that ensure sustainability over a long period of time. These results indicate that it is possible to invest in order to influence and achieve reasonable financial returns ([6]).

Also, according to a sample of influential investment projects implemented by 266 investment institutions internationally, the results of the achieved financial return came within the expected limits for about 82% of the projects, while the targeted financial return exceeded 16% of them, and came less than expected in 2% Just. On the other hand, clarity, reliability, and comparability in measuring impact are also among the most important challenges facing effective investment. Despite the progress made in the past decade in terms of measuring the impact of this type of project, and tracking changes in the social and environmental results associated with these investments, there is still lack of clarity regarding the basic concepts and inconsistency of impact measurement to hamper reaching a unified approach in this regard .

In terms of international experiences to encourage influential investment, the summary clarified that governments play an important role to stimulate influential investment by providing an environment that supports these investments, whether by providing a legal and regulatory framework supporting these investments, or by stimulating the direction of private investment for this type of project. In this regard, it is clear that many governments and international blocs have directed more effective investment support recently. The data of the Organization for Economic Cooperation and Development indicate that there are many general initiatives aimed at supporting effective investment, including about 590 global initiatives that vary between local and development cooperation initiatives in the field of influencing investment implemented by donor countries, opening the way for activating the role of international development aid in supporting Influential investment. More than half of the local initiatives were implemented in Europe and about a quarter in Asia.

At the level of the Arab countries, despite the positive developments witnessed by a number of social indicators in the Arab region, the region still faces social and development challenges, perhaps the most important of which is reducing poverty, unemployment, empowering women, and improving levels of education and health. Achieving a positive improvement in these areas requires directing more investments to projects with social and development goals. The region also needs driving investment for economic diversification and to combat climate change.

It is estimated that the Arab region needs to provide 230 billion dollars annually to achieve the sustainable development goals 2030 ([7]), which is a huge amount that requires mobilizing financing capacities for the public and private sectors to achieve tangible progress in this framework. On the other hand, as indicated, it is clear that the Arab region's share of global influential investment has decreased to no more than one percent. These investments are also concentrated, according to available information, in a limited number of countries in the region.

Also, despite the fact that the Arab countries have made important steps in corporate governance and adopting sustainable development strategies, the approach taken in these countries remains fragmented and faces challenges to integrate sustainable development into economic policies and the nature of regulatory frameworks for the business community. The biggest challenge is the need to develop clear policies and efficient mechanisms to finance the sustainable development goals.

Based on the foregoing, there is a great opportunity to benefit from the influencing investment in the implementation of many projects with social returns related mainly to achieving the sustainable development goals, which requires many policy interventions to encourage this type of investment. Accordingly, the summary provides a set of recommendations at the level of policy-making to stimulate effective investment in Arab countries, as follows:

Arab governments support effective investment:

To stimulate influencing investment, there are many proposed mechanisms according to global best practices, among them: 1. Establishing state-owned investment funds specializing in influential investment, 2. Engaging in partnerships with the private sector to implement this type of investment through mutual funds, 3. Encourage Public investment and development institutions are directed to moving towards influential investment and in line with development priorities adopted to achieve sustainable development goals.

Ensuring an enabling environment for effective investment work:

Promoting effective investment work requires the presence of national visions of development that define social and development priorities and a proposal for priority projects in which the private sector can participate, including all details of projects, both in relation to the required investments, development returns, target groups, the time span of projects, and expected financial returns And put that to the business community. Encouraging influencing investment also requires the provision of a favorable business environment and an integrated framework for the work of these investments, including a stimulating legal environment, and a set of incentives provided by the state to these investors, whether it comes to tax incentives or other incentives that attract investment according to the levels of effective investment engagement in priority projects that Determined by the state.

Activating the role of sovereign funds in influential investment

Sovereign funds in Arab countries play an important role in promoting domestic investment and supporting economic diversification efforts. The role of a number of these funds has also recently grown in financing plans and strategic visions of Arab countries whose achievement of sustainable development goals is a top priority. These funds can represent a major supporter of influential investment in the countries in which they are present, especially in light of a number of them going to allocate a percentage of their annual revenues to local investment targets aimed at increasing employment opportunities, improving education and health levels, empowering women, supporting local environments, and supporting energy sources Renewable.

Encouraging the issuance of social impact bonds

Social Impact Bonds are a type of public-private partnership that aims to provide social programs for disadvantaged communities. These contracts - also called pay-for-success contracts - leverage private investment and expertise from service providers to improve the social outcomes of publicly funded services. The tendency of the supervisory authorities of the financial sector to motivate investors to issue such bonds and link this to a variety of incentives obtained by the private sector that issues or invests in this type of bond contributes to encouraging the issuance of this type of bond [8].

Benefit from long-term institutional investment

Insurance, pension and social security funds play an important role in the Arab countries, given that their long-term institutional investments can contribute to supporting the country's plans towards achieving the desired development goals. In this context, it is estimated that the assets of insurance and pension funds provide good long-term financing sources in many Arab countries that can be relied upon to finance many development projects. For example, the assets of non-bank financial institutions in the Gulf Cooperation Council countries are estimated at $ 573 billion ([9]). Working to find the appropriate framework to employ this liquidity and direct it in a sound and thoughtful way to finance projects with a feasible economic return would enable Arab countries to achieve their economic goals and objectives.

Increased awareness levels of the influencing investment role

Levels of awareness of the importance of influencing investment and its mechanisms are still largely absent from the business community in the Arab countries, which requires the investment authorities and supervisory authorities on the financial sector to work to increase levels of awareness of this type of investment and encourage the dissemination of national and international best practices in this regard What provides integrated models of these projects and a unified understanding of the business community about the nature of these projects and their great ability to enable the business community to fulfill its obligations within the framework of corporate social responsibility.

The full version of the issue is available at the following link:

Policy Brief on “Effective Investing”

[1] IFC, (2019). “Impact Investing at IFC”.

[2] UNCTAD, (2014). “Developing countries face $ 2.5 trillion annual investment gap in key sustainable development sectors, UNCTAD report estimates.”

[3] Business and Sustainable Development Commission (2017). “Better Business, Better World”, Jan.

[4] McKinsey Quarterly, (2018). “A Closer Look at Impact Investing”, March.

[5] IFC, (2019). "Creating Impact: The Promise of Impact Investing", April.

[6] IFC, (2019). Ibid.

[7] Arab Forum for Environment and Development, (2018). Annual Report: Financing Sustainable Development in the Arab Countries, November.

[8] IFC, (2019). "Creating Impact The Promise of Impact Investing", April.

[9] IMF, (2018). “How Developed and Inclusive are Financial Systems in the GCC?”,

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